Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

YES x NO
o

Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of registrants Common Shares ($0.01 par
value) outstanding as of August 1, 2006 was 73,230,687.

Assured Guaranty Ltd. (the Company) is a Bermuda-based
holding company which provides, through its operating subsidiaries, credit
enhancement products to the public finance, structured finance and mortgage
markets. Credit enhancement products are financial guarantees or other types of
support, including credit derivatives, that improve the credit of underlying
debt obligations. Assured Guaranty Ltd. applies its credit expertise, risk
management skills and capital markets experience to develop insurance,
reinsurance and derivative products that meet the credit enhancement needs of
its customers. Under a reinsurance agreement, the reinsurer, in consideration
of a premium paid to it, agrees to indemnify another insurer, called the ceding
company, for part or all of the liability of the ceding company under one or
more insurance policies that the ceding company has issued. A derivative is a
financial instrument whose characteristics and value depend upon the
characteristics and value of an underlying asset. Assured Guaranty Ltd. markets
its products directly to and through financial institutions, serving the U.S.
and international markets. Assured Guaranty Ltd.s financial results include
four principal business segments: financial guaranty direct, financial guaranty
reinsurance, mortgage guaranty and other.
These segments are further discussed in Note 10.

Financial guaranty insurance provides an unconditional and
irrevocable guaranty that protects the holder of a financial obligation against
non-payment of principal and interest when due. Financial guaranty insurance
may be issued to the holders of the insured obligations at the time of issuance
of those obligations, or may be issued in the secondary market to holders of
public bonds and structured securities. A loss event occurs upon existing or
anticipated credit deterioration, while a payment under a policy occurs when
the insured obligation defaults. This requires the Company to pay the required
principal and interest when due in accordance with the underlying contract. The
principal types of obligations covered by the Companys financial guaranty
direct and financial guaranty assumed reinsurance businesses are structured
finance obligations and public finance obligations. Because both businesses
involve similar risks, the Company analyzes and monitors its financial guaranty
direct portfolio and financial guaranty assumed reinsurance portfolio on a
coordinated basis.

Mortgage guaranty insurance is a specialized class of
credit insurance that provides protection to mortgage lending institutions
against the default of borrowers on mortgage loans that, at the time of the
advance, had a loan to value in excess of a specified ratio. Reinsurance in the
mortgage guaranty insurance industry is used to increase the insurance capacity
of the ceding company, to assist the ceding company in meeting applicable
regulatory and rating agency requirements, to augment the financial strength of
the ceding company, and to manage the ceding companys risk profile. The Company provides mortgage guaranty protection
on an excess of loss basis.

The
Company has participated in several lines of business that are reflected in its
historical financial statements but that the Company exited in connection with
its 2004 initial public offering (IPO), including, but not limited to,
equity layer credit protection, trade credit reinsurance and title reinsurance.
These lines of business make up the Companys other segment.

2.
Basis of Presentation

The unaudited interim consolidated financial
statements, which include the accounts of the Company, have been prepared in
conformity with accounting principles generally accepted in the United States
of America (GAAP) and, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the Companys financial condition, results of operations and cash flows for
the periods presented. The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual
results could differ from those estimates. These

7

unaudited
interim consolidated financial statements cover the three-month period ended
June 30, 2006 (Second Quarter 2006) and the three-month period ended June 30,
2005 (Second Quarter 2005), and the six-month period ended June 30, 2006 (Six
Months 2006) and the six-month period ended June 30, 2005 (Six Months 2005).
Operating results for the three- and six-month periods ended June 30, 2006 and
2005 are not necessarily indicative of the results that may be expected for a
full year. Certain items in the prior
year unaudited interim consolidated financial statements have been reclassified
to conform with the current period presentation. These unaudited interim
consolidated financial statements should be read in conjunction with the
Companys consolidated financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2005, filed with the
Securities and Exchange Commission.

Certain of the Companys subsidiaries are subject to
U.S. income tax. The provision for
income taxes is calculated in accordance with Statement of Financial Accounting
Standards (FAS) FAS No. 109, Accounting for Income Taxes. The Companys provision for income taxes for
interim financial periods is not based on an estimated annual effective rate
due to the variability in changes in fair value of its derivative financial
instruments. A discrete calculation of
the provision is calculated for each interim period.

3.
Recent Accounting Pronouncements

In February 2006, the Financial Accounting
Standards Board (FASB) issued FAS No. 155, Accounting for Certain Hybrid
Financial Instruments (FAS 155) which amends FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (FAS 133) and FAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (FAS 140), and addresses issues raised in FAS 133 Implementation
Issue No. D1, Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets. The primary objectives of FAS 155 are: (i) with
respect to FAS 133, to address the accounting for beneficial interests in
securitized financial assets and (ii) with respect to FAS 140, eliminate a
restriction on the passive derivative instruments that a qualifying special
purpose entity may hold. FAS 155 is effective for all financial instruments
acquired or issued after the beginning of an entitys first fiscal year that
begins after September 15, 2006. The Company is currently evaluating the
implications of FAS 155 on its financial statements.

In July 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company
is assessing FIN 48 and has not determined the impact that the adoption of FIN
48 will have on its results of operations or financial position.

To limit its exposure on assumed
risks, at the time of the IPO, the Company entered into certain proportional
and non-proportional retrocessional agreements with other insurance companies,
primarily subsidiaries of ACE Limited (ACE), to cede a portion of the risk
underwritten by the Company. In addition, the Company enters into reinsurance
agreements with non-affiliated companies to limit its exposure to risk on an
on-going basis.

8

In the event that any or all of the reinsurers are
unable to meet their obligations, the Company would be liable for such
defaulted amounts. Direct, assumed, and ceded amounts were as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,

2006

2005

2006

2005

(in thousands of U.S. dollars)

Premiums Written

Direct

$

68,418

$

20,942

$

98,666

$

44,697

Assumed

43,066

19,528

68,202

73,870

Ceded

(1,139

)

(10,314

)

(5,739

)

(11,942

)

Net

$

110,345

$

30,156

$

161,129

$

106,625

Premiums Earned

Direct

$

21,887

$

16,806

$

43,115

$

38,036

Assumed

28,475

42,248

59,003

71,660

Ceded

(2,178

)

(10,790

)

(5,879

)

(13,342

)

Net

$

48,184

$

48,264

$

96,239

$

96,354

Loss and Loss
Adjustment Expenses

Direct

$

(12,644

)

$

4,703

$

(15,675

)

$

2,636

Assumed

7,250

(71,385

)

10,542

(80,574

)

Ceded

(1,119

)

7,549

(1,762

)

9,409

Net

$

(6,513

)

$

(59,133

)

$

(6,895

)

$

(68,529

)

Net written premiums for Second Quarter 2006 and Six
Months 2006 were $110.3 million and $161.1 million, respectively, compared with
$30.2 million and $106.6 million for Second Quarter 2005 and Six Months 2005,
respectively. The increase in direct
written premiums for both periods is primarily attributable to several
financial guaranty transactions written during Second Quarter 2006 in the
United Kingdom (UK) with upfront premiums totaling $41.0 million. Assumed written premiums increasedin Second Quarter 2006 compared with
Second Quarter 2005 due to more deals being written on an upfront basis during
Second Quarter 2006 while Second Quarter 2005 was comprised of more installment
based deals. Also contributing to the
increase is a Second Quarter 2005 transaction whereby Financial Security
Assurance Inc. (FSA) reassumed from Assured Guaranty Re Ltd. (AG Re) $18.4
million of healthcare related business (FSA transaction).

The decrease in
assumed written premiumsforSix Months 2006
compared with Six Months 2005 is primarily due to a large excess of loss
reinsurance transaction of $16.3 million
written during the three month period ended March 31, 2005 in our mortgage
guaranty segment.

Ceded written and earned
premiums have decreased in Second Quarter 2006 compared with Second Quarter
2005 and Six Months 2006 compared with
Six Months 2005 due to the run-off and novation of our trade credit business,
which is 100% retroceded to ACE.

Loss and loss adjustment expenses (LAE) were $(6.5)
million and $(6.9) million for Second Quarter 2006 and Six Months 2006,
respectively. The major component of
these amounts is a $10.1 million loss
recovery from third party litigation settlements recorded during Second
Quarter 2006 from our equity layer credit
protection business, which was exited in connection with the IPO. This recovery was partially offset by
increased loss reserves of $5.4 million in our financial guaranty
reinsurance segment, of which $3.8 million related to a rating downgrade of a
European infrastructure transaction and
$1.6 million related to the rating downgrade of various credits. In addition to these increases Six Months
2006 also contained a $2.5 million case reserve addition due to a U.S. public
infrastructure transaction.

Loss and loss adjustment expenses of $(59.1) million
in Second Quarter 2005 and $(68.5) million in Six Months 2005, was the result
of a third party settlement agreement that was reached during Second Quarter
2005, with two parties relating to a reinsurance claim incurred in 1998 and
1999, resulting in a recovery of $63.7 million.

9

Also in First Quarter 2005 the Company recovered $6.8
million relating to this same reinsurance claim. In addition, during First Quarter 2005, the
Company recovered $1.1 million relating to its exited equity layer credit
protection business. Loss recoveries for all periods presented are shown in the
statements of operations and comprehensive income in loss and loss adjusted
expenses.

Reinsurance recoverable on ceded
losses and LAE as of June 30, 2006 and December 31, 2005 were $11.3
million and $12.4 million, respectively and are all related to our other
segment. Of these amounts, $11.1 million and $12.3 million, respectively,
relate to reinsurance agreements with ACE.

The
following summarizes the Companys gross written premiums by significant
client:

Three Months Ended
June 30,

Six Months Ended
June 30,

Gross Written Premiums by Client

2006

2005

2006

2005

($ in millions)

Financial
Security Assurance Inc.(1)

$

18.2

$

10.4

$

25.7

$

32.6

Ambac Assurance
Corporation

10.5

9.7

14.8

20.4

Financial
Guaranty Insurance Company

9.5

3.3

12.9

5.6

MBIA Insurance
Corporation

2.3

4.2

5.8

8.9

(1) Second
Quarter 2005 and Six Months 2005 excludes $18.4 million of reassumption
premiums related to the Companys healthcare business.

Agreement
with Financial Security Assurance Inc.

During Second Quarter 2005, Assured Guaranty Corp. (AGC)
and AG Re, two of the Companys subsidiaries, entered into a reinsurance
agreement with FSA pursuant to which substantially all of FSAs financial
guaranty risks previously ceded to AGC (the Ceded Business) was assumed by AG
Re. This agreement was effective as of January 1, 2005. In connection with the transaction, AGC
transferred liabilities of $169.0 million, consisting primarily of unearned
premium reserves. All profit and loss
related items associated with this transfer were eliminated in consolidation,
with the exception of profit commission expense, certain other operating
expenses, and provision for income taxes.
Since this transaction transferred unearned premium reserve from AGC, a U.S. tax paying entity, to AG Re, a
non-U.S. tax paying entity, the Company released a deferred tax liability
related to differences between the book and tax carrying amounts of unearned
premium reserves which resulted in a tax benefit. The total impact of all these items increased
net income $1.9 million for both Second
Quarter 2005 and Six Months 2005. FSA
has released AGC from all liabilities with respect to the Ceded Business.
AG Re has assumed substantially all of AGCs liabilities with respect to the
Ceded Business. FSA may receive a profit commission on the Ceded Business based
on its future performance.

FSA has also reassumed from AG Re approximately $12.0
million of unearned premium reserves, net of ceding commissions, of healthcare
related business with an approximate par value of $820.0 million.

5.
Commitments and Contingencies

Lawsuits arise in the ordinary course of the Companys
business. It is the opinion of the Companys management, based upon the
information available, that the expected outcome of these matters, individually
or in the aggregate, will not have a material adverse effect on the Companys
financial position, results of operations or liquidity, although an adverse
resolution of a number of these items could have a material adverse effect on
the Companys results of operations or liquidity in a particular quarter or
fiscal year.

In the ordinary course of their respective businesses,
certain of the Companys subsidiaries assert claims in legal proceedings
against third parties to recover losses paid in prior periods. The amounts, if
any, the Company will recover in these proceedings are uncertain, although
recoveries in any one or more of these proceedings during any quarter or fiscal
year could be material to the Companys results of operations in that
particular quarter or fiscal year.

10

In April 2005, AGC received a Notice of Order to
Preserve (Order) from the Office of the Commissioner of Insurance, State of
Georgia (Commissioner). The Order was directed to ACE Limited, and all
affiliates and requires the preservation of documents and other items related
to finite insurance and a broad group of other insurance and reinsurance
agreements. Also in April 2005, AGC, and numerous other insurers, received a
subpoena from the Commissioner related to the initial phase of the
Commissioners investigation into finite-risk transactions. The subpoena
requests information on AGCs assumed and ceded reinsurance contracts in force
during 2004. AGC provided the required information in response to the subpoena
in January of 2006 and has not been contacted further by the Commissioner.

During Second Quarter 2006, the Companys wholly owned
subsidiary, Assured Guaranty Re Overseas Ltd. (AGRO), and a number of other
parties, completed various settlements with defendants in the In re: National Century Financial Enterprises Inc. Investment
Litigation now pending in the United States District Court for the
Southern District of Ohio - Eastern District. AGRO received approximately $10.1
million (pre-tax) in Second Quarter 2006, from the settlements. AGRO originally
paid claims in 2003 of approximately $41.7 million (pre-tax) related to
National Century Financial Enterprises Inc. To date, including the settlements
described above, the Company has recovered $16.6 million (pre-tax). This is a
partial settlement of the litigation, and the litigation will continue against
other parties.

The Company is party to reinsurance agreements with
all of the major monoline primary financial guaranty insurance companies. The
Companys facultative and treaty agreements are generally subject to
termination (i) upon written notice (ranging from 90 to 120 days)
prior to the specified deadline for renewal, (ii) at the option of the
primary insurer if the Company fails to maintain certain financial, regulatory
and rating agency criteria which are equivalent to or more stringent than those
the Company is otherwise required to maintain for its own compliance with state
mandated insurance laws and to maintain a specified financial strength rating
for the particular insurance subsidiary or (iii) upon certain changes of
control of the Company. Upon termination under the conditions set forth in
(ii) and (iii) above, the Company may be required (under some of its
reinsurance agreements) to return to the primary insurer all statutory unearned
premiums, less ceding commissions, attributable to reinsurance ceded pursuant
to such agreements after which the Company
would be released from liability with respect to the ceded business.
Upon the occurrence of the conditions set forth in (ii) above, whether or
not an agreement is terminated, the Company may be required to obtain a letter
of credit or alternative form of security to collateralize its obligation to
perform under such agreement or it may be obligated to increase the level of
ceding commission paid.

6.
Long-Term Debt and Credit Facilities

The Companys unaudited interim
consolidated financial statements
include long-term debt, used to fund the Companys insurance operations,
and related interest expense, as described below.

Senior Notes

On May 18,
2004, Assured Guaranty US Holdings Inc., a subsidiary of the Company, issued
$200.0 million of 7.0% Senior Notes due 2034 for net proceeds of $197.3
million. The proceeds of the offering were used to repay substantially all of a
$200.0 million promissory note issued to a subsidiary of ACE in April 2004
as part of the IPO related formation transactions. The coupon on the Senior
Notes is 7.0%, however, the effective rate will be approximately 6.4%, taking
into account the effect of a cash flow hedge executed by the Company in
March 2004. The Company recorded interest expense of $3.3 million,
including $0.2 million of amortized gain on the cash flow hedge, for both
Second Quarter 2006 and Second Quarter 2005. The Company recorded interest
expense of $6.7 million, including $0.3 million of amortized gain on the cash
flow hedge, for both Six Months 2006 and Six Months 2005. These Senior Notes
are fully and unconditionally guaranteed by Assured Guaranty Ltd.

11

Credit Facilities

$300.0 million Credit Facility

On April 15, 2005, Assured Guaranty Ltd. and certain of its
subsidiaries entered into a $300.0 million three-year unsecured revolving
credit facility (the $300.0 million credit facility) with a syndicate of
banks, for which ABN AMRO Incorporated and Bank of America, N.A. acted as lead
arrangers and KeyBank National Association (KeyBank) acted as syndication
agent. Under the $300.0 million credit facility, each of AGC, Assured Guaranty
(UK) Ltd. (AG (UK)), a subsidiary of AGC organized under the laws of the
United Kingdom, Assured Guaranty Ltd., AG Re and AGRO are entitled to request
the banks to make loans to such borrower or to request that letters of credit
be issued for the account of such borrower. Two letters of credit have
been issued, both on behalf of AGRO, with an aggregate stated amount of
approximately $20.7 million.

If drawn, the
proceeds of the loans and letters of credit are to be used for working capital
and other general corporate purposes of the borrowers and to support
reinsurance transactions.

At the closing of
the $300.0 million credit facility, (i) AGC guaranteed the obligations of
AG (UK) under such facility, (ii) Assured Guaranty Ltd. guaranteed the
obligations of AG Re and AGRO under such facility and agreed that, if the
Company Consolidated Assets (as defined in the related credit agreement) of AGC
and its subsidiaries were to fall below $1.2 billion, it would, within 15 days,
guarantee the obligations of AGC and AG (UK) under such facility and
(iii) Assured Guaranty Overseas US Holdings Inc., as a Material Non-AGC
Subsidiary (as defined in the related credit agreement), guaranteed the
obligations of Assured Guaranty Ltd., AG Re and AGRO under such facility.
Subsequently, AG Re and AGRO, as Material Non-AGC Subsidiaries, both guaranteed
the obligations of the other and of Assured Guaranty Ltd. under such facility.

The
$300.0 million credit facilitys financial covenants require that Assured
Guaranty Ltd. (a) maintain a minimum net worth of $1.2 billion,
(b) maintain an interest coverage ratio of at least 2.5:1, and
(c) maintain a maximum debt-to-capital ratio of 30%. In addition, the
$300.0 million credit facility requires that AGC: (x) maintain
qualified statutory capital of at least 80% of its statutory capital as of the
fiscal quarter prior to the closing date of the facility and (y) maintain
a ratio of aggregate net par outstanding to qualified statutory capital of not
more than 150:1. Furthermore, the $300.0 million credit facility contains
restrictions on Assured Guaranty Ltd. and its subsidiaries, including, among
other things, in respect of their ability to incur debt, permit liens, become
liable in respect of guaranties, make loans or investments, pay dividends or
make distributions, dissolve or become party to a merger, consolidation or
acquisition, dispose of assets or enter into affiliate transactions. Most of
these restrictions are subject to certain minimum thresholds and exceptions. A
default by one borrower will give rise to a right of the lenders to terminate
the facility and accelerate all amounts then outstanding. As of June 30, 2006
and December 31, 2005, Assured Guaranty was in compliance with all of those
financial covenants.

As of June 30,
2006 and December 31, 2005, no amounts were outstanding under this facility nor
have there been any borrowings under this facility.

Non-Recourse Credit Facility

AGC is also party to a non-recourse
credit facility with a syndicate of banks which provides up to
$175.0 million specifically designed to provide rating agency-qualified
capital to further support AGCs claims paying resources. The facility expires
in December 2010. As of June 30, 2006 and December 31, 2005, no
amounts were outstanding under this facility nor have there been any borrowings
under this facility.

The Companys failure to comply with certain covenants
under the Companys credit facilities could, subject to grace periods in the
case of certain covenants, result in an event of default. This could require
the Company to repay any outstanding borrowings in an accelerated manner.

Committed
Capital Securities

On April 8,
2005, AGC entered into four separate agreements with four different
unaffiliated custodial trusts pursuant to which AGC may, at its option, cause
each of the custodial trusts to purchase up to $50.0 million of

12

perpetual preferred stock of AGC. The custodial trusts
were created as a vehicle for providing capital support to AGC by allowing AGC
to obtain immediate access to new capital at its sole discretion at any time
through the exercise of the put option. If the put options were exercised, AGC
would receive $200.0 million in return for the issuance of its own perpetual
preferred stock, the proceeds of which may be used for any purpose including
the payment of claims. The put options were not exercised as of June 30,
2006. Initially, all of the committed
capital securities (the CCS Securities) were issued to a special purpose
pass-through trust (the Pass-Through Trust). The Pass-Through Trust is a newly
created statutory trust organized under the Delaware Statutory Trust Act formed
for the purposes of (i) issuing $200,000,000 of Pass-Through Trust
Securities to qualified institutional buyers within the meaning of
Rule 144A under the Securities Act of 1933, as amended,
(ii) investing the proceeds from the sale of the Pass-Through Trust
Securities in, and holding, the CCS Securities issued by the Custodial Trusts
and (iii) entering into related agreements. Neither the Pass-Through Trust
nor the Custodial Trusts are consolidated in Assured Guaranty Ltd.s financial
statements.

During Second
Quarter 2006 and Six Months 2006, AGC incurred $0.7 million and $1.3 million,
respectively, of put option premiums which are an on-going expense. During both
Second Quarter 2005 and Six Months 2005, AGC incurred $2.5 million which
consists of $2.0 million of investment banking fees associated with the
committed capital securities and put option premiums which are an on-going
expense. These expenses are presented in the Companys unaudited interim
consolidated statements of operations and comprehensive income under other
expense.

Prior to the
adoption of FAS 123R, the Company followed the guidance of APB 25 and did not
record share-based compensation expense related to employee stock options in
the statement of operations, since for all grants the exercise price was equal
to the market value of the common stock on the grant date.

The Company
elected to use the modified prospective transition method for implementing FAS
123R. Under this transition method, compensation expense includes: (a) compensation expense for all
share-based payments granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of FAS 123, and (b) compensation
expense for all share-based payments granted on or after January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of FAS 123R. Because we elected to use the modified prospective transition
method, results for prior periods have not been restated and new awards are
valued and accounted for prospectively upon adoption.

Beginning January
1, 2006, upon adoption of FAS 123R, the Company recorded share-based
compensation for the cost of stock options, restricted stock and the Company
sponsored employee stock purchase plan. As a result of adopting FAS 123R on
January 1, 2006, the Companys Second Quarter 2006 income before income taxes
and net income are $1.5 million and $1.1 million lower, respectively, and for
Six Months 2006 are $3.2 million and $2.5 million lower, respectively, than if
it had continued to account for share-based compensation under APB 25. Basic
and diluted earnings per share for Second Quarter 2006 and Six Months 2006 are
$0.01 and $0.03 lower, respectively, than if the Company had continued to
account for share-based compensation under APB 25.

Share-based
compensation expense in Second Quarter 2006 and Six Months 2006 was $3.1
million ($2.5 million after tax) and $6.3 million ($5.2 million after tax),
respectively. The effect on basic and
diluted earnings per share for Second Quarter 2006 and Six Months 2006 was $0.03
and $0.07, respectively. Included in Second Quarter 2006 and Six Months 2006
expense was $0.5 million and $1.2 million, respectively, for stock award grants
to retirement-eligible employees. FAS 123R requires these awards to be expensed
over the period through the date the employee first becomes eligible to
retire and is no longer required to
provide service to earn part or all of the award, regardless of the employees
intent of retirement. The amount of share-based compensation capitalized in
Second

13

Quarter 2006 and Six Months 2006 as deferred
acquisition costs (DAC) was $0.7 million and $1.2 million, respectively.
Share-based compensation expense in Second Quarter 2005 and Six Months 2005 was
$1.7 million ($1.4 million after tax) and $3.0 million ($2.7 million after
tax), respectively.

The following
table presents pre-DAC and pre-tax, share-based compensation cost by
share-based type:

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands of U.S. dollars)

2006

2005

2006

2005

Share-Based
Employee Cost

Restricted
Stock

Recurring amortization

$

1,957

$

1,382

$

3,764

$

2,561

Accelerated amortization for retirement eligible

employees

364



807



Subtotal

2,321

1,382

4,571

2,561

Stock
Options

Recurring amortization

909



1,953



Accelerated amortization for retirement eligible

employees

150



355



Subtotal

1,059



2,308



ESPP

32



64



Total
Share-Based Employee Cost

3,412

1,382

6,943

2,561

Share-Based
Directors Cost

Restricted
Stock

72

120

139

150

Restricted
Stock Units

229

149

413

307

Total
Share-Based Directors Cost

301

269

552

457

Total Share-Based Cost

$

3,713

$

1,651

7,495

$

3,018

For Second Quarter
2005 and Six Months 2005, had the compensation expense been determined in accordance with the fair value method
recommended in FAS 123, the Companys net income and net income per
share would have been adjusted to the pro forma amounts indicated below:

(in thousands of U.S. dollars, except per share amounts)

Three Months Ended
June 30, 2005

Six Months Ended
June 30, 2005

Net income as
reported

$

66,750

$

111,098

Add: Stock-based
compensation expense included in
reported net income, net of income tax

1,445

2,653

Deduct:
Compensation expense, in accordance with FAS
123, net of income tax

2,394

4,701

Pro forma net
income

$

65,801

$

109,050

Basic Earnings
Per Share:

As reported

$

0.90

$

1.50

Pro forma

$

0.89

$

1.47

Diluted Earnings
Per Share:

As reported

$

0.90

$

1.49

Pro forma

$

0.89

$

1.46

Assured Guaranty Ltd. Share-Based
Compensation Plans

As of
April 27, 2004, the Company adopted the Assured Guaranty Ltd. 2004
Long-Term Incentive Plan (the Incentive Plan). The Incentive Plan authorizes
the grant of incentive stock options, non-qualified stock options, stock
appreciation rights, and full value awards that are based on the Companys
common shares. The number of common shares that may be delivered under the
Incentive Plan may not exceed 7,500,000. As
of June 30, 2006, 2,682,432 common shares were available for grant under
the Incentive Plan. In January 2005, the Company implemented the
Stock Purchase Plan (Stock Purchase Plan) in accordance with Internal Revenue
Code

14

Section 423. The Company reserved for issuance
and purchases under the Stock Purchase Plan 100,000 shares of its common
stock. As
of June 30, 2006, 80,512 common shares were available for grant under the Stock
Purchase Plan. The Incentive Plan and
the Stock Purchase Plan are described more fully in the Companys 2005 Annual
Report on Form 10-K.

Stock Options

Nonqualified
or incentive stock options may be granted to employees and directors of the
Company. Stock options are generally
granted once a year with exercise prices equal to the closing price on the date
of grant. To date, the Company has only issued nonqualified stock
options. All stock options granted to
employees vest in equal annual installments over a three-year period and expire
10 years from the date of grant. None of our options have a performance or
market condition. The following table
summarizes stock option activity for the six months ended June 30, 2006:

Weighted Average

Aggregate

Options for

Weighted

Remaining

Intrinsic

Common

Average

Contractual

Value (1)

Options

Shares

Exercise Price

Term (years)

(in thousands)

Outstanding at
December 31, 2005

2,457,302

$

18.05

Granted

785,967

$

25.49

Exercised

(24,774

)

$

17.91

Forfeited

(52,996

)

$

19.99

Outstanding at
June 30, 2006

3,165,499

$

19.86

8.2

17,442

Vested and exercisable
at June 30, 2006

1,348,481

$

17.95

7.5

$

9,999

(1)The
aggregate intrinsic value was calculated based on the positive difference
between the closing price of the Companys common stock on June 30, 2006 (i.e.
$25.37) and the weighted average exercise price of the underlying options.

The Company
recorded $1.1 million ($0.8 million after tax) and $2.3 million ($1.8 million
after tax) in share-based compensation related to stock options during Second
Quarter 2006 and Six Months 2006, respectively. As of June 30, 2006 the total
unrecognized compensation expense related to outstanding non-vested stock
options was $5.2 million, which will be adjusted in the future for the
difference between estimated and actual forfeitures. The Company expects to
recognize that expense over the weighted-average remaining service period of
1.6 years.

The
weighted-average grant-date fair value of options granted were $6.86 and $5.08
for Second Quarter 2006 and Second Quarter 2005, respectively. The
weighted-average grant-date fair value of options granted were $6.71 and $4.53
for Six Months 2006 and Six Months 2005, respectively. The fair value of options
issued is estimated on the date of grant using the Black-Scholes option-pricing
model, with the following weighted-average assumptions used for grants in
2006 and 2005:

Three Months Ended
June 30,

Six Months Ended
June 30,

2006

2005

2006

2005

Dividend yield

0.6%

0.6%

0.5%

0.7%

Expected
volatility

20.12%

20.92%

20.44%

20.82%

Risk free
interest rate

5.1%

4.2%

4.6%

4.1%

Expected life

5 years

5 years

5 years

5 years

Forfeiture rate

6.0%

6.0%

6.0%

6.0%

These
assumptions were based on the following:

·The
expected dividend yield is based on the current expected annual dividend and
company share price on the grant date,

·Expected
volatility is estimated at the date of grant based on the historical share
price volatility, calculated on a daily basis,

15

·The
risk-free interest rate is the implied yield currently available on U.S.
Treasury zero-coupon issues with an equivalent remaining term to the granted
stock options,

·The
expected life is based on the average expected term of our guideline companies,
which are defined as similar entities, since the Company has insufficient
expected life data,

·The
forfeiture rate is based on the rate used by our guideline companies, since the
Company has insufficient forfeiture data. Estimated forfeitures will be
reassessed at each balance sheet date and may change based on new facts and
circumstances.

For options
granted before January 1, 2006, the Company amortizes the fair value on an
accelerated basis. For options granted on or after January 1, 2006, the
Company amortizes the fair value on a straight-line basis. All options are
amortized over the requisite service periods of the awards, which are generally
the vesting periods, with the exception of retirement-eligible employees. For retirement-eligible employees options are
amortized over the period through the date the employee first becomes eligible
to retire and is no longer required to provide service to earn part or all of
the award. The Company may elect to use
different assumptions under the Black-Scholes option valuation model in the
future, which could materially affect the Companys net income or earnings per
share.

The total intrinsic value of options exercised during
Six Months 2006 was $0.2 million. During Six Months 2006, $0.4 million was
received from the exercise of stock options and an immaterial related tax
benefit was recorded.

Restricted Stock Awards

The Company has
granted restricted stock awards to employees and directors of the Company. Restricted
stock awards generally vest in equal annual installments over a four-year
period. Restricted stock awards are
amortized over the requisite service periods of the awards, which are generally
the vesting periods, with the exception of retirement-eligible employees,
discussed above. Prior to the adoption of FAS 123R, the Company presented
restricted stock issuances on the balance sheet in common stock and additional
paid-in capital with an offset in unearned stock grant compensation as a
separate component of shareholders equity. In accordance with the provisions
of FAS 123R, on January 1, 2006, the Company reclassified the balance in
unearned stock grant compensation to common stock and additional paid-in
capital in shareholders equity. The following table summarizes restricted
stock award activity for the six months ended June 30, 2006:

Nonvested Shares

Number of
Shares

Weighted Average
Grant-Date
Fair Value

Nonvested at
December 31, 2005

1,021,124

$

18.12

Granted

454,333

$

25.49

Vested

(268,638

)

$

18.00

Forfeited

(30,336

)

$

19.54

Nonvested at June 30,
2006

1,176,483

$

20.96

The Company
recorded $2.4 million ($1.9 million after tax) and $4.7 million ($3.7 million
after tax) in share-based compensation, related to restricted stock awards,
during Second Quarter 2006 and Six Months 2006, respectively. Restricted stock
awards are expensed on a straight-line basis over the vesting period. As of
June 30, 2006 the total unrecognized compensation cost related to outstanding
nonvested restricted stock awards was $20.8 million, which the Company expects
to recognize over the weighted-average remaining service period of 2.4 years.

Restricted Stock Units

The Company has
granted restricted stock units to directors of the Company. Restricted stock
units vest over a one-year period.

The following table
summarizes restricted stock unit activity (excluding dividend equivalents) for
the six months ended June 30, 2006:

16

Nonvested Stock Units

Number of
Stock Units

Weighted Average Grant-Date
Fair Value

Nonvested at
December 31, 2005

36,301

$

20.25

Granted

34,030

$

24.39

Vested

(28,773

)

$

19.29

Forfeited



$



Nonvested at June 30,
2006

41,558

$

24.30

The Company recorded
$0.2 million ($0.2 million after tax) and $0.4 million ($0.4 million after tax)
in share-based compensation during Second Quarter 2006 and Six Months 2006,
respectively. The compensation for restricted stock units is expensed on a
straight-line basis over the vesting period. As of June 30, 2006, the total
unrecognized compensation cost related to outstanding nonvested restricted
stock units was $0.7 million, which the Company expects to recognize over the
weighted-average remaining service period of 0.7 years.

Employee Stock Purchase Plan

Participation in the Stock Purchase Plan is available
to all eligible employees. Maximum annual purchases by participants are limited
to the number of whole shares that can be purchased by an amount equal to
10 percent of the participants compensation or, if less, shares having a
value of $25,000. Participants may purchase shares at a purchase price equal to
85 percent of the lesser of the fair market value of the stock on the
first day or the last day of the subscription period. The Company recorded
$32,000 ($23,000 after tax) and $64,000 ($45,000 after tax) in share-based
compensation during Second Quarter 2006 and Six Months 2006, respectively.

8. Earnings Per
Share

The following table sets forth
the computation of basic and diluted earnings per share (EPS):

Three Months Ended
June 30,

Six Months Ended
June 30,

2006

2005

2006

2005

(in thousands of U.S. dollars, except per share amounts)

Net income as
reported

$

44,514

$

66,750

$

79,396

$

111,098

Basic shares

73,633

73,813

73,695

74,134

Effect of
dilutive securities:

Stock awards

809

281

947

362

Diluted shares

74,442

74,094

74,642

74,496

Basic EPS

$

0.60

$

0.90

$

1.08

$

1.50

Diluted EPS

$

0.60

$

0.90

$

1.06

$

1.49

9. Liability
For Tax Basis Step-Up Adjustment

In
connection with the IPO, the Company and ACE Financial Services Inc. (AFS), a
subsidiary of ACE, entered into a tax
allocation agreement, whereby the Company and AFS will make a Section 338 (h)(10) election that will have
the effect of increasing the tax basis of certain affected subsidiaries
tangible and intangible assets to fair value.
Future tax benefits that the Company derives from the election will be
payable to AFS when realized by the Company.

As a result of the
election, the Company has adjusted its net deferred tax liability, to reflect
the new tax basis of the Companys affected assets. The additional basis is expected to result in
increased future income tax deductions and, accordingly, may reduce income
taxes otherwise payable by the Company.
Any tax benefit realized

17

by the Company will be paid to AFS. Such tax benefits will generally be
calculated by comparing the Companys affected subsidiaries actual taxes to
the taxes that would have been owed by those subsidiaries had the increase in
basis not occurred. After a 15-year
period, to the extent there remains an unrealized tax benefit, the Company and
AFS will negotiate a settlement of the unrealized benefit based on the expected
realization at that time.

The Company
initially recorded a $49.0 million reduction of its existing deferred tax
liability, based on an estimate of the ultimate resolution of the Section
338(h)(10) election. Under the tax
allocation agreement, the Company estimates that as of the IPO date, it will
pay $20.9 million to AFS and accordingly has established this amount as a
liability. The initial difference, which is attributable to the change in the
tax basis of certain liabilities for which there is no associated step-up in
the tax basis of its assets and no amounts due to AFS, resulted in an increase
to additional paid-in capital of $28.1 million during 2004. During both Six Months 2006 and Six Months
2005 the Company paid AFS $0.4 million.

10.
Segment Reporting

The Company has
four principal business segments: (1) financial guaranty direct, which
includes transactions whereby the Company provides an unconditional and
irrevocable guaranty that indemnifies the holder of a financial obligation
against non-payment of principal and interest when due, and could take the form
of a credit derivative; (2) financial guaranty reinsurance, which includes
agreements whereby the Company is a reinsurer and agrees to indemnify a primary
insurance company against part or all of the loss which the latter may sustain
under a policy it has issued; (3) mortgage guaranty, which includes
mortgage guaranty insurance and reinsurance whereby the Company provides
protection against the default of borrowers on mortgage loans; and
(4) other, which includes several lines of business in which the Company
is no longer active, including, but not limited to equity layer credit protection, trade credit reinsurance and
title reinsurance.

The Company does
not segregate assets and liabilities at a segment level since management
reviews and controls these assets and liabilities on a consolidated basis. The
Company allocates operating expenses to each segment based on a comprehensive
cost study. During 2006, the Company implemented a new operating expense
methodology to more closely apply expenses to the individual operating
segments. This new methodology was based on a comprehensive study and is based
on departmental time estimates and headcount. 2005 amounts have been restated
to show this new methodology on a comparative basis. Management uses underwriting gains as the
primary measure of each segments financial performance.

The
following tables summarize the components of underwriting gain (loss) for each
reporting segment:

Three Months Ended June 30, 2006

Financial
Guaranty
Direct

Financial
Guaranty
Reinsurance

Mortgage
Guaranty

Other

Total

(in millions of U.S. dollars)

Gross written
premiums

$

68.4

$

41.7

$

1.2

$

0.1

$

111.5

Net written premiums

67.8

41.3

1.2



110.3

Net earned
premiums

21.2

23.1

3.7



48.2

Loss and loss
adjustment expenses

(2.5

)

5.7

0.4

(10.1

)

(6.5

)

Profit
commission expense



1.0

0.7



1.7

Acquisition
costs

2.3

8.5

0.3



11.3

Other operating
expenses

12.0

3.4

0.3



15.6

Underwriting gain

$

9.4

$

4.6

$

2.0

$

10.1

$

26.1

18

Three Months Ended June 30, 2005

Financial
Guaranty
Direct

Financial
Guaranty
Reinsurance

Mortgage
Guaranty

Other

Total

(in
millions of U.S. dollars)

Gross written
premiums

$

20.9

$

8.2

$

1.9

$

9.5

$

40.5

Net written
premiums

20.4

8.0

1.9



30.2

Net earned
premiums

16.0

27.2

5.1



48.3

Loss and loss
adjustment expenses

5.0

(64.1

)





(59.1

)

Profit
commission expense



2.3

1.0



3.3

Acquisition
costs

1.6

9.5

0.6



11.7

Other operating
expenses

9.5

4.7

0.3



14.5

Underwriting (loss)
gain

$

(0.1

)

$

74.8

$

3.2

$



$

77.9

Six Months Ended June 30, 2006

Financial
Guaranty
Direct

Financial
Guaranty
Reinsurance

Mortgage
Guaranty

Other

Total

(in millions of U.S. dollars)

Gross written
premiums

$

98.6

$

60.5

$

3.8

$

3.9

$

166.9

Net written
premiums

97.5

59.8

3.8



161.1

Net earned
premiums

41.9

46.4

7.9



96.2

Loss and loss
adjustment expenses

(4.3

)

8.5

0.2

(11.3

)

(6.9

)

Profit
commission expense



1.4

1.6



3.0

Acquisition
costs

4.2

17.2

0.6



22.1

Other operating
expenses

25.4

6.8

0.6



32.8

Underwriting gain

$

16.6

$

12.6

$

4.8

$

11.3

$

45.2

Six Months Ended June 30, 2005

Financial
Guaranty
Direct

Financial
Guaranty
Reinsurance

Mortgage
Guaranty

Other

Total

(in millions of U.S. dollars)

Gross written
premiums

$

44.7

$

42.2

$

21.3

$

10.4

$

118.6

Net written
premiums

43.5

42.0

21.3



106.6

Net earned
premiums

36.4

50.2

9.7



96.4

Loss and loss
adjustment expenses

3.5

(71.2

)

0.2

(1.1

)

(68.5

)

Profit
commission expense



2.3

2.0



4.3

Acquisition
costs

3.1

17.6

1.1



21.9

Other operating
expenses

20.9

7.5

0.6



29.0

Underwriting gain

$

8.9

$

94.0

$

5.8

$

1.1

$

109.9

19

The following is a reconciliation
of total underwriting gain to income before provision for income taxes for the
periods ended:

Three Months Ended
June 30,

Six Months Ended
June 30,

2006

2005

2006

2005

(in millions of U.S. dollars)

Total
underwriting gain

$

26.1

$

77.9

$

45.2

$

109.9

Net investment
income

27.3

23.7

53.5

46.8

Net realized
investment (losses) gains

(1.0

)

1.7

(2.0

)

3.5

Unrealized gains
(losses) on derivative financial instruments

5.7

(12.5

)

5.7

(9.4

)

Other income



(0.2

)



0.1

Interest expense

(3.4

)

(3.4

)

(6.7

)

(6.7

)

Other expense

(0.7

)

(2.5

)

(1.3

)

(2.5

)

Income before provision
for income taxes

$

54.0

$

84.6

$

94.5

$

141.4

The following table provides the lines of businesses
from which each of the Companys segments derive their net earned premiums:

Three Months Ended
June 30,

Six Months Ended
June 30,

2006

2005

2006

2005

(in millions of U.S. dollars)

Financial
guaranty direct:

Public finance

$

1.7

$

0.4

$

2.8

$

0.5

Structured
finance

19.5

15.6

39.1

35.9

Total

21.2

16.0

41.9

36.4

Financial
guaranty reinsurance:

Public finance

14.4

12.7

30.0

23.7

Structured
finance

8.7

14.5

16.4

26.5

Total

23.1

27.2

46.4

50.2

Mortgage
guaranty:

Mortgage
guaranty

3.7

5.1

7.9

9.7

Total net earned premiums

$

48.2

$

48.3

$

96.2

$

96.4

The other segment had an
underwriting gain of $10.1 million for Second Quarter 2006 and $11.3 million
and $1.1 million for Six Months 2006 and Six Months 2005, respectively, as the
equity layer credit protection business recorded loss recoveries in both
periods. During Second Quarter 2005 the other segment had no underwriting gain
or loss.

20

11.
Subsidiary Information

The following tables present the
unaudited condensed consolidated financial information for Assured Guaranty
Ltd., Assured Guaranty US Holdings Inc., of which AGC is a subsidiary and other
subsidiaries of Assured Guaranty Ltd. as of June 30, 2006 and December 31, 2005
and for the three and six months ended June 30, 2006 and 2005.

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2006
(in thousands of U.S. dollars)

Assured
Guaranty Ltd.
(Parent
Company)

Assured
Guaranty
US Holdings Inc.

AG Re and
Other
Subsidiaries

Consolidating
Adjustments

Assured
Guaranty Ltd.
(Consolidated)

Assets

Total
investments and cash

$

683

$

1,175,922

$

1,092,479

$



$

2,269,084

Investment in
subsidiaries

1,690,407





(1,690,407

)



Deferred
acquisition costs



72,314

132,993



205,307

Reinsurance
recoverable



8,358

4,495

(1,560

)

11,293

Goodwill



85,417





85,417

Premiums
receivable



17,963

43,246

(19,027

)

42,182

Other

10,263

129,667

57,331

(75,106

)

122,155

Total assets

$

1,701,353

$

1,489,641

$

1,330,544

$

(1,786,100

)

$

2,735,438

Liabilities
and shareholders equity

Liabilities

Unearned premium
reserves

$



$

236,644

$

409,978

$

(44,692

)

$

601,930

Reserves for
losses and loss adjustment expenses



58,766

57,430

(1,560

)

114,636

Profit
commissions payable



3,715

25,901



29,616

Deferred income
taxes



31,796

(7,468

)



24,328

Long-term debt



197,359





197,359

Other

18,575

75,193

40,464

(49,441

)

84,791

Total
liabilities

18,575

603,473

526,305

(95,693

)

1,052,660

Total
shareholders equity

1,682,778

886,168

804,239

(1,690,407

)

1,682,778

Total liabilities and
shareholders equity

$

1,701,353

$

1,489,641

$

1,330,544

$

(1,786,100

)

$

2,735,438

21

CONDENSED CONSOLIDATING
BALANCE SHEET
AS OF DECEMBER 31, 2005
(in thousands of U.S. dollars)